The opinion of the court was delivered by: DENNY CHIN
This is a civil action brought pursuant to the Racketeer Influenced and Corrupt Organizations Act of 1970 ("RICO"), 18 U.S.C. § 1964(c). The complaint alleges violations of Section 1962(c) (conducting affairs of enterprise affecting interstate commerce through pattern of racketeering activity), Section 1962(d) (conspiracy to violate Section 1962(c)), and common law fraud.
Defendants Daniel Stieglitz ("Stieglitz") and Mark Sugel ("Sugel") move to dismiss the claims against them under either Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted or Rule 9(b) for failure to plead fraud with sufficient particularity. Plaintiff Peter Brooke ("Brooke") opposes these motions and requests leave to amend the complaint if the motions are granted. For the reasons set forth below, the motion to dismiss is granted with respect to defendant Stieglitz but denied with respect to defendant Sugel. Brooke's request for leave to amend is granted.
Brooke and defendant Daniel Schlesinger ("Schlesinger") founded Net 30 Accessories, Inc. ("Net 30") in 1990, each owning 50% of the corporation's stock. Brooke, the Vice President of Net 30, contributed the capital and personally guaranteed the corporation's factoring agreement,
first with Republic National Bank ("Republic") and later with NationsBanc. Brooke alleges that defendants Schlesinger, Sugel, and Stieglitz, among others, perpetrated a massive fraud at Net 30, resulting in Brooke's sale of his interest in the company and loss of his investment, as well as subjecting him to liability on his personal guarantee. Schlesinger, the President of the corporation, allegedly commenced his fraudulent activity in 1991 when he diverted funds owed to Net 30 to his personal bank account. Other acts of fraud followed, which will be detailed below. Schlesinger and his father, defendant George Schlesinger, have settled with plaintiff.
Sugel, Vice President and National Sales Manager of Net 30, joined the company in February 1992. By the Winter of 1992, defendants Schlesinger and Sugel commenced a plan to loot Net 30 and Brooke by fraudulently securing advances from Republic and by stealing money directly from the company. It is alleged, on information and belief, based upon information from former Net 30 employees and the existence of a shortfall in the amounts received by the factoring banks, that Schlesinger and Sugel obtained improper advances from Republic by ordering employees of Net 30 to engage in the "invoicing fraud." This scheme included the mailing of fraudulent invoices to Republic from the commencement of the scheme until November 1993 and to NationsBanc from November 1993 until May 1994.
In June 1992, Stieglitz became involved in the fraud when Schlesinger and Sugel hired him as comptroller in order to hide the fraud from Brooke. When Brooke requested daily reports on Net 30's financial condition, Schlesinger, Sugel, and Stieglitz prepared false daily financial reports, which they showed to Brooke, often via facsimile. In addition, at the direction of Schlesinger and Sugel, Stieglitz told Net 30 employees to lie to Brooke regarding the number of "chargebacks" from customers seeking to return goods or obtain proof of delivery should Brooke call on the telephone to inquire about such chargebacks. Stieglitz also instructed employees that they should not permit Brooke to review reports from the bank.
On December 30, 1993, in response to George Schlesinger's statement that he would only reimburse Brooke for losses caused by a different scheme involving Schlesinger if Brooke left the company, Brooke sold his interest in Net 30 back to the company for $ 176,999.94, to be paid in 26 bi-weekly installments, and a promise to return to Brooke the remainder of his capital in Net 30. Schlesinger, Sugel, and George Schlesinger knew but did not tell Brooke that Net 30 would be unable to fulfill these obligations ("the scheme to defraud Brooke out of his interest in Net 30").
In January 1994, the scheme entered a new phase involving the formation of a corporation, D.A.L., to enable Net 30 to avoid its obligations to NationsBanc under the factoring agreement. Schlesinger, Sugel, and George Schlesinger enlisted defendants Anthony and Louis Ottimo (the "Ottimos") to help them perpetrate this scheme by managing the day to day operations of Net 30. With the knowledge of the other defendants, the Ottimos proceeded to loot the company by hiding inventory at a Long Island warehouse and instructing customers to make payments directly to D.A.L. instead of to NationsBanc (the "NationsBanc fraud"). Sugel participated in this scheme until February 1994. Meanwhile, the invoicing fraud continued until May 1994.
Stieglitz argues that the RICO claim asserted against him is deficient in three respects: (1) it fails to allege predicate acts of mail and wire fraud; (2) it fails to establish the continuity prong of the pattern of racketeering activity requirement; and (3) it fails to allege that Brooke's injuries were proximately caused by Stieglitz's alleged racketeering activity. Stieglitz also moves to dismiss the RICO conspiracy claim on the grounds that the complaint does not allege the elements of a conspiracy. In addition, Stieglitz moves to dismiss Brooke's common law fraud claim. Finally, Stieglitz contends that the fraud claims asserted against him are not pleaded with the particularity required by Rule 9(b). Sugel adopts these bases for the motion to dismiss and emphasizes that the claims against him do not meet the particularity requirements of Rule 9(b).
I. Standards for Motion to Dismiss
In ruling upon defendants' motions to dismiss under Rules 9(b) and 12(b)(6), the Court must view the complaint in the light most favorable to the plaintiff, accepting all allegations contained in the complaint as true. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S. Ct. 1683, 1686, 40 L. Ed. 2d 90 (1974); Annis v. County of Westchester, 36 F.3d 251, 253 (2d Cir. 1994) (Rule 12(b)(6) motion); Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989) (Rule 9(b) motion). All reasonable inferences are to be drawn in favor of the plaintiff, and the complaint should not be dismissed unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief. See Scheuer, 416 U.S. at 236, 94 S. Ct. at 1686; Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 102, 2 L. Ed. 2d 80 (1957); Christ Gatzonis Elec. Contractor, Inc. v. New York City Sch. Constr. Auth., 23 F.3d 636, 639 (2d Cir. 1994).
To state a civil RICO claim, Brooke must show that defendants (1) conducted or participated in the conduct of (2) an enterprise's affairs (3) through a pattern (4) of racketeering activity (5) that caused injury to plaintiff's business or property. See 18 U.S.C. § 1962(c); Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 498, 105 S. Ct. 3275, 3285, 87 L. Ed. 2d 346 (1985); McLaughlin v. Anderson, 962 F.2d 187, 190 (2d Cir. 1992).
II. Stieglitz's Motion to Dismiss
To plead a pattern of racketeering activity, Brooke must establish that each defendant committed at least two acts of racketeering activity ("predicate acts") within a ten year period. 18 U.S.C. § 1961(5) . The statute defines "racketeering activity" to include wire fraud (18 U.S.C. § 1343) and mail fraud (18 U.S.C. § 1341). 18 U.S.C. § 1961(1)(B).
The first type of predicate act alleged against Stieglitz is wire fraud. The wire fraud statute provides as follows:
Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such ...